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Evolution, coordination, and banking panics

  • Temzelides, Theodosios

I study equilibrium selection by an evolutionary process in an environment with multiple equilibria, one of which involves a banking panic. The analysis is built on a repeated version of the Diamod-Dybvig (1983) model. The optimal (run free) equilibrium is uniquely selected if it is also "risk dominant." Furthermore, the probability of observing a panic increases as the size of the banks decreases. I discuss local interaction and contagion effects that allow for a bankrun to spread first among banks in the same geographic location and then throughout the entire population.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 40 (1997)
Issue (Month): 1 (September)
Pages: 163-183

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Handle: RePEc:eee:moneco:v:40:y:1997:i:1:p:163-183
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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